Transcript Becoming a Parnter

August Aquila
AQUILA Global Advisors
•August is the CEO of AQUILA Global Advisors, LLC which
specializes in succession planning, mergers and acquisitions,
compensation plans and transformational strategic planning
•Selected as one of the “Top 100 Most Influential People” in
the Accounting Profession by Accounting Today in 2004,
2007, 2009 & 2010
•AAM Hall of Fame member, founding AAM Board Member
•First marketing director to become a partner in Top 100 Firm
(1985)
•Former partner in top 100 firm – Friedman, Eisenstein,
Raemer & Schwartz (FERS)
•Former executive with American Express Tax & Business
Services, Inc
Firm Size (Number of Partners)
( ) 2 to 5 partners
( ) 6 to 12 partners
( ) 12 to 20 partners
( ) More than 20 partners
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Selection criteria more important than ever
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Determine you firm’s philosophy
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Characteristics of an equity partner
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Personality traits of an equity partner
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Know your numbers – Buy-In
Part 1
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Do you currently have . . .
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Too many partner employees rather than partner
owners?
Too many underperforming partners?
Too few rising stars?
Just too many partners?
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Scarcity of good people
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Fewer entrepreneurs
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Firms facing profit squeeze
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Strong fee competition
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Succession issues
Part 2
Some Considerations:
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Profitability of the Firm.
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Leveraging requirements to accomplish your
return to the equity
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Overall growth of the Firm
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Individuals with unique talents
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As a firm grows, should the number of
partners also grow?
What are the firm’s expectation for gross
revenue per partner, realization, etc?
What character and competence are critical?
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Do you require some minimum level of
origination?
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Some minimum level of billings?
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Would you depart from these levels and why?
Make sure you . . .
1. Establish realistic policies and admission
criteria that majority of partners support.
2. Review them to ensure they remain realistic
with the passing of time.
3. Make certain that partners remain acutely aware
of the firm's policies and partnership admission
criteria.
4. Improve the partner evaluation procedures to
minimize the number of under-qualified
candidates who receive actual consideration.
Does your firm have too many partners?
( ) Yes
( ) No
Has the firm ever let a partner go?
( ) Yes
( ) No
Part 3
High
C
o
m
p
e
t
e
n
c
e
Low Character
High Competence
High Character
High Competence
Prima Donna Rainmaker
IDEAL PERSON
Low Character
Low Competence
High Character
Low Competence
No hope – don’t try
May be able to improve
Low
Character
High
See it
Own it
Solve it
Do it
Versus
Ignore it
Not my job
Finger pointing
Tell what to do
Cover your tail
Wait & see
Source: The Oz Principle
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Equity partners should be individuals with a
high tolerance for the risk of ownership
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Positive Characteristics:
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Puts firm first
Team player
Lives the firm’s values
Has a high degree of emotional intelligence
Accountable for his/her own actions
Staff want to work with him/her
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Which of the following are characteristics of
a “prima donna”? (select one or more
choices)
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Not accountable
Brings in a lot of business
Not a team player
None of the above
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Minimum requirements:
◦ Commitment to the firm
◦ Commitment to client service
◦ Commitment to on-the-job training
◦ Commitment to life-long learning
◦ Commitment to the profession
◦ Commitment to personal & professional ethics
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Integrity
Respect for others
Entrepreneurial desire (motivation)
Emotional intelligence
Social presence
Sense of humor (can laugh at him/herself)
Embraces change
Stretches oneself outside of comfort zone
Accountable
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Make sure the partner fits into the culture of
your firm
◦ Do they share the firm’s vision?
◦ Are they motivated by it?
◦ If they are getting on your bus are they in the
right seat?
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Categories
1.
2.
3.
4.
5.
6.
7.
Technical/Niche Excellence
Business Development
Client maintenance (Satisfaction/Retention)
Business Management
Personal Production
Leadership
People Developer
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Does the individual bring a needed expertise
to the firm?
Are they passionate about a specific industry?
Does the individual have a "professional
identity" within and outside of the firm for
skill in their specialty areas?
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Acquire, develop, and retain clients
The ability to develop and originate new
clients for the firm is one of the most
significant criteria
Brings in business for self and others
Will you admit someone into the partnership
without this skill?
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Most firms encourage staff to establish a
professional relationship with clients
The ability of the staff to relate and interact
with a client is an important factor to be
considered
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Do clients like working with the potential
partner?
◦ Measure client turnover
◦ A/R and WIP issues
◦ Client loyality
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Client profitability
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Billing and Collection
◦ DSO WIP and A/R
◦ Write downs
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Clients managed (book of business)
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Billable hours
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Cash collected
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Leverage
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Help others
Manage a department and/or a niche area
Gain confidence of team, partners, and clients
Transfer client relationships
Cope with change
Firm fan
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Provide on-the-job training and mentoring
Give staff the opportunity to get involved with
clients
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Staff stay at the firm because of the partner
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Staff want to be on partner’s engagements
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Why do firms need a partner admittance
policy today? (selection one or more
choices)
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To protect the long-term value of the practice.
To address succession issues
To make the firm a stronger
All of the above
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Make sure you have a buy-out formula
before you let someone buy-in
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Needs to be fair
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Discount?
◦ Sweat equity ≠ what the market will pay.
◦ Average internal valuation is 65% - 75%
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Average buy in amount around $110,000
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How do owners determine a price?
Should payment go to the firm or to “selling”
owners?
How and on what schedule should the new
partner make payments?
What percentage of ownership should the
firm offer?
What is the new partner actually buying?
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An interest in accrual basis capital (ABC)
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An interest in the goodwill (G)
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Firms use different approaches:
◦ An interest in both the ABC and in the G
◦ An interest in the G (but no interest in the ABC that
exists as of the date of admission)
◦ An interest in the G at a discount and full price for
the ABC
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Some firms may offer a better price and larger
ownership because new partner has brought in a lot
of business
Some firms may offer a small ownership percentage
for free based on contributions that new partner has
made to the firm
Some firms believe new partners should pay full value
and seek full payment of the purchase price, which
includes both the accrual-basis capital (ABC)—that is,
the equity of the partnership interest—as well as
100% of the “goodwill” value (G), defined as 100% of
gross fees
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Facts: The owners give an interest in the G
(but no interest in the ABC that exists as of
the date of admission).
The owners retain 100% of the tangible assets
but give the new owner a share of the
intangible asset (G). The new owner shares in
the future growth of the tangible assets
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Example: Individual gets a 5% interest in the
G and the existing ABC is $1 million
If a year later the ABC is $1.2 million, the new
owner now has a 5% stake in the increase,
which would equal $10,000 (that is, 5% of
$1,200,000 – $1,000,000 = $200,000 X .05
= $10,000).
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Facts: An interest in the G at a bargain price
e.g. 75% of current value.
Firm grosses $2 million (G value) and has
$500,000 in ABC.
The new person buys a 5% interest at full
price for the ABC and pays for only 75% of the
value for the G portion
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Example: The new owner pays a total of
$100,000
The full price for the ABC (5% of $500,000 =
$25,000)
Plus the 75% price for the G (5% of
$2,000,000 X .75 = 1,500,00
5% x 1.500,000 = 75,000).
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Facts: Firm grosses $2m, ABC = $500,000
Buys a 5% interest in the G at full price (that
is, 100% of current value) and 5% interest in
the ABC at full price
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Example, owners who require the new owner
to pay full price for the 5% interest in both
the ABC and G, would obtain $125,000.
5% x 500,000 = $25,000 plus
5% x 2,000,000 x 1 = $100,000)
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Does the firm discount the value of the goodwill
for a new partner?
( ) Yes
( ) No
What does it cost a new partner to buy into your
firm?
a. Don’t know
b. There is no cost
c. Up to $25,000
d. $25,000 to $50,000
e. $50,000 to $100,000
f. $100,000 plus
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This has been a brief overview of what needs
to be considered when you bring in a new
equity partner.
The key is to have crystal clear guidelines for
admitting an equity partner.
Determine what is right for your firm.
What did I forget to address?
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For a free consultation please contact:
August J. Aquila
952-930-1295
[email protected]
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THANK YOU –
YOU’VE BEEN A
GREAT AUDIENCE
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